1. sautee the peppers in the olive oil with onion and garlic for about 4-5 minutes.

2. add the water.

3. keep cooking on medium-high heat until you have cooked off the majority of the water.

4. cool the peppers to room temperature, and once cooled, puree them in the blender.

5. add the vinegar as you are pureeing.

6. puree until smooth if you like a smooth, liquidy sauce, or just chop if you like a chunky sauce.

Notes - you can add/substitute tabasco and/or serrano chilies to make the sauce hotter, or jalapeno peppers.
To make the sauce sweeter, add more italian peppers and less hot peppers. To make the sauce more vinegary, add a little more vinegar.

This recipe is a base recipe - once you make it, you can figure out your own way to tweak it to your liking!

Mike - i am sure that you can make this sauce with either dried or freeze-dried peppers. You'll have to give it a test try and let us know what you used and how it turns out!